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When a bank account holder makes a deposit in a bank account for a predetermined period at a fixed rate of interest, it is called a fixed deposit scheme or FD. Fixed deposits, as a financial instrument, have been one of the safest and the most guaranteed investment schemes which have delivered handsome returns consistently over a significant period of time. Fixed deposits are a good initial investment for amateur investors or for those who want to play safe when it comes to investments.
A fixed deposit is a good starting point for new investors. All you have to do is visit the nearest branch of the bank or go online to your respective bank’s official website to open and invest in a fixed deposit scheme for a specific tenure or maturity period. FDs are an efficient instrument that help in creating a habit of savings in an individual. Let’s take a look at some of the benefits of fixed deposits offered by various banks in India.
Investment in fixed deposits gives you guaranteed return and hence, your returns are assured in a FD scheme. The returns are normally over and above the normal returns offered by a savings bank account. However, returns may vary as per the period of investments. Currently, banks are providing FD rate of interest ranging from 7% to 8% as per the period chosen for investment. If the account holder breaks his/her fixed deposit before maturity, then it will affect the returns due to premature withdrawal and penalty.
Fixed deposits provide good flexibility of investing your money over a certain duration of time. There are great numbers of options with regards to the tenure of investment ranging from very short term of 7 days to long period of up to 10 years. Every bank has its own respective scheme and criteria for their FD scheme. Nevertheless, an individual can go with the bank offering the best rates. It is also not necessary for a person to hold a bank account in order to open an FD with the bank. It is recommended to go for a duration which will best suits your individual situation, thereby ensuring there is no loss on an investment due to premature withdrawal.
Although the fixed deposit scheme comes with a set maturity date, it is also possible to break the FD before its maturity. The premature withdrawal does not involve any complicated procedures and can be done easily anytime for a small penalty. As life is full of risks, a financial emergency can strike anyone and urgent cash requirement may be needed for a wedding, medical treatment or sustain income flow during a loss in business or loss of a job. The penalty charged in fixed deposit for early withdrawal is less than selling of shares or real estate, where the asset is sold due to distress situation and is often sold at a very low price in urgent cases. When it comes to fixed deposit, the investor can withdraw his/her money anytime and will only have to bear a loss of certain interest income.
The customer has the flexibility to choose the frequency of interest they wish to receive, be it on an annual, quarterly, or monthly basis. This will end up as a passive source of income for the investor. Alternatively, the investor also has the option of going for a Cumulative FD scheme in which the interest is reinvested into the FD delivering better even better returns than a normal FD scheme. In cumulative FD, the term of the investment has to be for a longer duration to get the best results.
A cash crunch can strike anyone. Liabilities can arise due to certain situations and a person may need urgent cash at a point in time. The fixed deposit also offers a loan facility to the investor to tackle such situations. However, most banks offer loan amounts in the range of the 60% to 90% of the actual fixed deposit amount. The rate of interest chargeable on the loan will vary on the percentage of the loan offered in such cases. The loan is disbursed very quickly as it comes under the category of safe loan where the bank has the guarantee in fixed deposit, if the investor is unable to pay the loan amount back.
Is it good to have fixed deposits?
Fixed deposits are one of the easiest and safest investment options available in India. The fixed deposit scheme can be opened online or offline. A person who wants to invest in the fixed deposit can choose any bank and he/she does not need to have a bank account to invest in FD with the particular bank. FD helps to inculcate a habit of savings in a person and offers various benefits to the investor like guaranteed good returns, premature withdrawal, loan facility, nomination facility, etc. With all the advantages of FD, it is certainly good to have fixed deposits.
How do fixed deposits work?
When an investor invests in fixed deposits, they lock away the funds for a fixed duration, and the principal sum deposited helps to earn interest on a cumulative basis. The bank uses the deposited money to give out various loans and thus does businesses with the deposited money. This means that after every specific time interval, the income earned on your fixed deposits gets added to your principal amount which is called interest. The interest over time inflates the principal amount ensuring good returns on your investment.
What are the advantages and disadvantages of fixed deposits over regular savings accounts?
Fixed term deposits help the investor earn a better rate of interest as the money is locked away for certain duration. In a regular saving account, the interest rate is less as the investor can withdraw the money anytime and he/she does not have to pay any penalty fee.
Is Fixed Deposit beneficial?
Fixed deposits offer a lot of benefits and advantages to an investor. However, investments are beneficial if they fulfil the investor’s financial goal. It is recommended to check the fixed deposit investment structure and rate of return and calculate the amount the investor will get on maturity. If the amount satisfies his/her investment goals, then it is beneficial. If not, then an investor should consider other avenues.